What Is Bitcoin Mining? Process & How It Works Explained

What Is Bitcoin Mining?

Bitcoin mining refers to the process of validating and recording transactions on the Bitcoin network. The primary purpose of Bitcoin mining is twofold: validating transactions to prevent fraud and adding new blocks to the blockchain, thereby creating new Bitcoins in a decentralized manner.

Key Takeaways:

• The process of bitcoin mining involves the verification of new transactions against the Bitcoin network, which results in the production of new bitcoins.
• Bitcoin mining is the process by which Bitcoin transactions are validated digitally on the Bitcoin network and added to the blockchain ledger.
• It is done by solving complex cryptographic hash puzzles to verify blocks of transactions that are updated on the decentralized blockchain ledger.

Solving these puzzles requires powerful computing power and sophisticated equipment. In return, miners are rewarded with Bitcoin, which is then released into circulation hence the name Bitcoin mining.

Also Read: Blockchain Tutorial for Beginners to Advanced Level

What Is Bitcoin?

Bitcoin is the first decentralized digital currency that allows peer-to-peer transfers without any intermediaries such as banks, governments, agents, or brokers, using the underlying technology of blockchain.

Anyone around the world on the network can transfer Bitcoins to someone else on the network regardless of geographic location; you just need to just open an account on the Bitcoin network and have some Bitcoins in it, and then you can transfer those Bitcoins. How do you get Bitcoins in your account? You can either purchase them online or mine them.

Bitcoin can be used for online purchases and or as an investment instrument. Primarily it’s used to buy goods and services.

Bitcoin Advantages

Compared to traditional fiat currencies, assets can be transferred faster on the bitcoin network. The system also has lower transaction fees, because it’s decentralized and there are no intermediaries, and it is cryptographically secure—the identities of the sender and the receiver are kept hidden, and it is impossible to counterfeit or hack the transactions. Plus, all the information is available on a public ledger, so anyone can view the transactions.

Unveil the fascinating realm of Bitcoin mining while fortifying your cybersecurity expertise through our comprehensive cyber security course. Learn the intricacies of blockchain technology and cryptographic protocols that underpin cryptocurrencies like Bitcoin, all while mastering the strategies to secure these decentralized systems. With hands-on training in ethical hacking, digital forensics, and network security, you'll be equipped to not only mine cryptocurrencies but also safeguard them from evolving cyber threats.

What Is Crypto Mining?

Cryptocurrency mining is a process of creating new digital "coins." However, that is as far as simplicity goes. The process of recovering these coins requires solving complex puzzles, validating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger to locate them.

What Is Blockchain?

As mentioned, blockchain is the underlying technology of bitcoin. Blockchain is a public distributed ledger in which transactions are recorded in chronological order. Any record or transaction added to the blockchain cannot be modified or altered, meaning transactions are safe from hacking. A block is the smallest unit of a blockchain, and it is a container that holds all the transaction details. A block has four fields, or primary attributes:

1. Previous hash: This attribute stores the value of the hash of the previous block, and that's how the blocks are linked to one another.
2. Data: This is the aggregated set of transactions included in this block—the set of transactions that were mined and validated and included in the block.
3. Nonce: In a “proof of work” consensus algorithm, which bitcoin uses, the nonce is a random value used to vary the output of the hash value. Every block is supposed to generate a hash value, and the nonce is the parameter that is used to generate that hash value. The proof of work is the process of transaction verification done in blockchain.
4. Hash: This is the value obtained by passing the previous hash value, the data and the nonce through the SHA-256 algorithm; it is the digital signature of the block.

SHA-256 is a cryptographic hash algorithm that produces a unique 256-bit alphanumeric hash value for any given input, and that is the unique feature of this cryptographic algorithm: Whatever input you give, it will always produce a 256-bit hash.

3 Concepts of Blockchain

To understand bitcoin mining, you have to first understand the three major concepts of blockchain.

1. Public distributed ledger: A distributed ledger is a record of all transactions maintained in the blockchain network across the globe. In the network, the validation of transactions is done by bitcoin users.
2. SHA-256: Blockchain prevents unauthorized access by using a hash function called SHA-256 to ensure that the blocks are kept secure. They are digitally signed. Their hash value, once generated, cannot be altered. SHA-256 takes an input string of any size and returns a fixed 256-bit output, and it is a one-way function—you cannot derive the reverse of the input reverse fully from the output (what you have generated).
3. Proof of work: In blockchain mining, miners validate transactions by solving a difficult mathematical puzzle called proof of work. To do that, the primary objective of the miner is to determine the nonce value, and that nonce value is the mathematical puzzle that miners are required to solve to generate a hash that is less than the target defined by the network for a particular block.

Bitcoin Profit and Bitcoin Mining Profitability

Bitcoin Profit is an automated crypto robot that helps trade Bitcoins and other cryptocurrencies to earn profit. It uses an AI algorithm to identify trading opportunities in the crypto market that can automatically close and open your trade, saving your time and manual intervention during trading. It claims that around 85% of its trades produce profits in normal market conditions. However, technical knowledge is required to calculate the profit generated through the Bitcoin mining process. 

Talking about the actual Bitcoin profit - the real money making - it depends upon the cost of the AISC hardware, electricity consumption, and the effectiveness of the mining software. Bitcoin Mining profitability has decreased in recent times compared to the previous years because of the rise in electricity costs, costlier hardware, difficulty in mining due to an increase in competition, and a decrease in the Bitcoin prices. Earlier, Bitcoin Mining was initiated using CPUs and easy AI Algorithms, making it profitable and less costly.

Bitcoin vs. Traditional Currencies

While both Bitcoin and traditional currency are similar in that both are a store of value, they differ in many ways. First things first, Bitcoin is the first and most recognized cryptocurrency - a digital currency that is secured by cryptography. Traditional currency, also referred to as fiat money, is a government-issued and regulated currency. 

Some differences between Bitcoin and traditional currencies are illustrated in the table below. 

How Does Bitcoin Mining Work

Blockchain is a decentralized peer-to-peer network that has been hailed as highly secure and transparent, hence trustworthy. This is because records in the blockchain network are secured using timestamps and cryptographic hash functions in such a way that after being added to the ledger, it is almost impossible and impractical to alter the transactions. At the core of blockchain security is the absence of centralized control. 

Here is a breakdown of what happens during bitcoin mining

• The Mining Requirements 

A bitcoin miner will first select their tools of the trade and set them up. These include:

• Hardware GPU (graphics processing unit), SSD for crypto mining, or ASIC (application-specific integrated circuit) 
• Mining software 
• A wallet 
• Preferred mining pool (if one chooses pool mining option instead of solo mining) 

Once all these are set up and the system fired up, it performs the mining process autonomously. Any other human involvement comes in the event of system or network failure, power outage, or regular system maintenance. 

• Elements of a Bitcoin Transaction 

When a transaction is initiated in the bitcoin network, three elements are involved:

• A transaction input
• A transaction output 
• The transaction amount 

For every transaction input, a bitcoin mining software generates a unique cryptographic hash puzzle that is difficult to decode. The software then groups the number of transactions required to form a block into a Merkle tree. 

• The Merkle Tree and the SHA-256 Algorithm

A Merkle tree is a data structure of the hashes in a block and acts as a summary of all the transactions in the block. In the Merkle tree, hashes of individual transactions known as transaction IDs are paired repeatedly using the SHA-256 algorithm until only one hash identifies the entire tree. This hash is known as the Merkle root or root hash. 

The Merkle tree enables the efficient verification of transactions in the bitcoin network. 

• The Block Header 

The Merkle root, the identifier of a Merkle tree, is stored in the block header. The block header contains information about the block and includes the following components: 

• The version number of the bitcoin software 
• The hash of the previous block 
• The Merkle root (root hash) 
• Timestamp 
• Cryptographic nonce 
• The target 

This is the information miners will use to solve the hash puzzle and add a block transaction. 

• Solving the Hash Puzzle 

Miners must solve the hash puzzle by finding the hash below a given target through the difficulty requirement. The target, stored in the header, is expressed as a 67-digit number that will determine the mining difficulty based on the number of miners competing to solve a hash function. It is important to note that this difficulty adjusts after every 2016 blocks are created depending on how much time it took miners in the previous 2016 blocks to solve an equation. This also helps to maintain the rate at which transactions are appended in the blockchain at 10 minutes. 

To solve the hash puzzle, miners will try to calculate the hash of a block by adding a nonce to the block header repeatedly until the hash value yielded is less than the target. Once a mining computer solves the puzzle, a new block is successfully created that is validated in the Bitcoin network after a consensus between the nodes has been reached. When a block is validated, the transactions bundled in it are verified and the block is added to the chain. As indicated above, this happens every 10 minutes.

As there will be many miners (systems) competing to solve the puzzle, the first miner to get the correct hash value earns a reward in Bitcoin. This process allows more Bitcoins in circulation.

Mining and Bitcoin Circulation

Bitcoin’s upper supply limit of 21 million bitcoin set by its source code by Satoshi Nakamoto, its inventor, is puzzling. However, experts have seen it as a huge advantage because the scarcity of supply breeds value and a stable price for the oldest crypto.  

From the genesis Bitcoin block mined in 2009 with 50 bitcoins, more bitcoins have since been mined and released into circulation. Bitcoin mining ensures that blocks of transactions are created and stacked in the right order in a way that can be traced and proven mathematically. With the creation of blocks comes bitcoins as a reward, which increases the number of bitcoins in circulation. 

Bitcoin architecture was structured ingeniously such that every 10 minutes, a block is discovered, and a fixed bitcoin award is offered for every block that is mined. 

Prevention of Hacking

What if someone tries to hack the data? Blockchain, as the name implies, is a chain of blocks—let’s call the blocks A, B and C. Each block has solved a puzzle and generated a hash value of its own, which is its identifier. Now suppose a person tries to tamper with block B and change the data. The data is aggregated in the block, so if the data of the block changes, then the hash value that is the digital signature of the block will also change. It will therefore corrupt the chain after it—the blocks ahead of block B will all get delinked, because the previous hash value of block C will not remain valid.

For a hacker to make the entire blockchain valid for the block B that has been changed, he or she would have to change the hash value of all the blocks ahead of block B. This would require a huge amount of computing power and is next to impossible. With this method, blockchain is non-hackable and prevents data modification.

Why Mine Bitcoin?

Let’s be straight: people primarily mine Bitcoin to earn profits. Other than that, people who are curious about this technology and how it works enjoy experimenting with this relatively new technology.

How to Mine Bitcoin?

The Bitcoin miners are suggested to use mining hardware, such as Ebang, Antminer, Minedollars, AvalonMiner, or more that generates new Bitcoins after every 10 minutes. To mine Bitcoin, the miner is advised to invest in a powerful setup designed specifically for mining cryptos.

Excessive or advanced computer knowledge must be possessed to operate the hardware system. The user then has to create at least one Bitcoin wallet for Bitcoin Mining that is secured and convenient. 

Once the mining hardware is set up and the Bitcoin wallet is created, the miner must adopt strategies to install and configure the mining software. The miner has to apply technical knowledge to improve the mining capacity. The mining process then begins after the miner downloads a soft copy of the blockchain of Bitcoin and clicks on the start button.

The miner needs to monitor the progress regularly to ensure that the mining application runs smoothly. However, the miner does not need to do anything manually and can rely on the mining hardware after the mining process is started. Because of the Bitcoin Mining process, new blocks are added to the blockchain.

Also Read: 10 Things You Didn’t Know About Bitcoin

How to Mine Bitcoin at Home?

Mining Bitcoins at home is challenging and requires certain steps to achieve good results. The first step is to set up the hardware properly and search for a strong power connection. The person then can create a mining wallet in any trading platform of their choice and join a mining pool to proceed further. The most important step is installing an effective mining software such as Awesome Miner, Easy Miner, and Pionex and then inserting the wallet details and the information about the mining pool. 

However, the hardware needed for mining is expensive, and everyone cannot afford it. Moreover, mining Bitcoins requires a lot of electricity consumption. Only people who have access to low-cost electricity can afford to mine Bitcoins at home. Therefore, Bitcoin Mining at home can be profitable but needs resources and efforts whose costs are huge.  

How to Calculate Bitcoin profit?

Keeping aside the actual Bitcoin profit earned by mining, miners have to perform a cost-benefit analysis to understand their break-even price before purchasing costly hardware or other mining equipment. 

To calculate the Bitcoin profit, one must analyze the amount spent purchasing Bitcoin currencies. The next step is to check how much 1 Bitcoin costs at the purchase and compare it with the current value. The differences between the current and old values will provide a clear idea about the amount of profit earned. 

Several factors that hinder Bitcoin's profit are:

Cost of Power

The price of electricity changes every season. Electricity is consumed not only to mine Bitcoins but also to prevent them from overheating and cooling them down. 

Time

There is no time length for mining. Many miners mine 24x7 as they can afford the mining cost. 

Bitcoin value

Changes in the Bitcoin value are ascertainable, affecting your Bitcoin profit and return on investment. 

Efficiency

Difficulty in mining can arise due to slow computers, low voltage, or any other factor, affecting efficiency.

How Much Does a Miner Earn - Bitcoin Halving 

Bitcoin halving refers to the splitting of block rewards into half to mean that miners’ reward for discovering a block is reduced by half. Halving exists to lower Bitcoin’s inflation rate and the rate at which new Bitcoins are released into circulation, keeping the price of Bitcoin stable. The halving event happens after every 210,000 blocks have been mined, which is roughly after every four years. The number of Bitcoins in circulation is calculated by the halving theory laid out by Satoshi Nakamoto in the Bitcoin protocol. 

When Bitcoin was first launched, the reward for every block mined started at 50 Bitcoins. To date, three halving events have taken place, and the block reward went from 50 from 2009, 25 from 2012, 12.5 from 2016, to the current 6.25 BTC from 2020. The last Bitcoin halving event took place on May 11th, 2020. 

By September 2021, 18.828 million of the 21 million Bitcoin cap had been mined and released into circulation, accounting for roughly 89.7% of all the Bitcoins to be mined. 

The next Bitcoin halving event is expected to take place in the early months of the year 2024. Halving should continue until all blocks are mined, and the 21 million Bitcoin supply cap is attained sometime in 2140. After this, the Bitcoin miners will only earn from transaction fees.

What Do I Need to Mine Bitcoins?

Mining must have been a lot easier in the early days of its launch. As bitcoin and the blockchain concept were relatively new, mining was left to hobbyists on a discovery path. In fact, bitcoin’s inventor Nakamoto mined the genesis block on a basic CPU. As bitcoin continues to gain wider adoption, it has also succeeded in drawing keen interest from investors, miners, and companies harnessing cryptocurrency as a mode of payment for products and services. With this, mining has become a very competitive undertaking, and the hardware and software demands for bitcoin mining are also more sophisticated. 

Today, bitcoin mining requires specialized tools, including: 

• Hardware such as GPU (graphics processing unit), SSD for crypto mining, ASIC (application-specific integrated circuit), or the latest FPGA (Field Programmable Gate Array) chips. When purchasing mining hardware, it is important to consider two factors, their hash rate (performance) and electricity consumption. 
• Mining software such as ECOS, BeMine, and Kryptex Miner 
• A bitcoin wallet from which an individual performs bitcoin transactions
• Preferred mining pool (if one chooses pool mining option instead of solo mining) 

Is Bitcoin Mining Profitable?

Bitcoin Mining is not profitable for all individual miners except a few due to the complicated mining process and high costs. All the miners cannot spend huge amounts of dollars setting up the hardware. A cost-benefit analysis is performed to ascertain the profitability. The amount of electricity consumption in kWh, efficiency, difficulty, time taken to complete the mining process, and the Bitcoin value are deciding factors. 

The cost of setting up the hardware is very high, and it requires an application of a high level of technical expertise. All the miners are not well equipped with these applications, resulting in low profits for these individual miners. Because of this, miners are recommended to join mining pools where a group of miners can work together. By following this approach, Bitcoin miners will be able to increase their chances of earning more rewards in more Bitcoins. 

Bitcoin Mining Calculator, a Bitcoin Profitability Calculator

Calculating the Bitcoin Mining profitability helps evaluate the mining rewards and mining costs. That can be done with the help of a Bitcoin Mining calculator, which requires the user to fill in details, including Bitcoin mining hashrate, consumption of power in Watts, cost of electricity in $/kWh, and maintenance fees. The hashrate values are adjusted, and an appropriate mining hardware device is selected from the ASIC Bitcoin miners list. 

The Bitcoin profitability calculator uses strategies for providing reliable and accurate profitability information about Bitcoins. This information is crucial for the miners as they make decisions about Bitcoin Mining based on such information. The miners continue the mining process only if a high profit is earned and the cost of electricity consumption is low. 

What Does It Take to Run a Profitable Bitcoin Mining Venture? 

• Choice of Hardware 

Bitcoin mining hardware performance is measured in terms of hash rate. Current new-generation ASIC miners produce 100 TH/s (trillion hashes per second) and cost somewhere between $8,000 - $10,000. Ordinary CPUs do not have the capacity to produce such fast hash rates.

• Location

Developed nations may well have an edge when it comes to location because of the low cost of power. Bitcoin is quite power-intensive. It was estimated that one bitcoin transaction requires approximately 1,544 kWh of power to complete, which is equivalent to around 53 days of normal power consumed in an average American household which translates to an average of $200 in cost for a single transaction at 13 cents per kWh. 

Thus finding the right location with lower electricity costs of less than 10 cents per kWh will help maintain a profitable bitcoin mining venture.

Profit From Bitcoin Mining 

In essence, earnings from bitcoin mining should be able to recover the cost of the mining requirements purchased as well as the running costs of electricity. This is possible with efficient hardware, lower electricity costs, and joining a reliable mining pool which we shall see below. 

Is Bitcoin Mining Legal?

No and Yes. 

Even though bitcoin has gained wide acceptance across the globe, it still remains highly contested in some countries because of its decentralized nature and volatility and its exorbitantly high power consumption.  

In countries like China, Russia, Bolivia, Algeria, and Ecuador, bitcoin trading is either restricted or outright illegal thanks to its decentralized nature, volatile value, association with criminal activities, and several other reasons. In other countries, the legal status of bitcoin is unknown. 

EU countries like Finland, Germany, France, and others as well as the United States, Canada, Australia, and the UAE, welcome bitcoin and is widely transacted.  

Only one country has adopted bitcoin as legal tender, El Salvador.

Risks and Limitations

To hear some people describing Bitcoin mining, you’d think that all you need to do is solve a few puzzles and you’ll be rolling in easy money. But remember, if something sounds too good to be true, then it probably is. Bitcoin has its share of limitations and risks, such as:

• It can leave security vulnerabilities that hackers can exploit
• There is no guarantee of success; you could wind up investing a huge amount of money in the necessary equipment and have virtually no ROI (Return on Investment).
• It’s responsible for boosting utility and computing costs.
• Since Bitcoin and other cryptocurrencies are volatile, even if you manage to successfully mine a respectable amount of cryptocurrency, you’ll still be underwater if the value suddenly plummets.
• Cryptocurrency is decentralized, so there are no government regulations. Consequently, there are no legal protections.
• Bitcoin transactions are irreversible. If you send the wrong amount or give the right amount to the wrong person, well, your options to correct things are limited.
•  And finally, regardless of the huge buzz that cryptocurrencies generate, at the end of the day, it’s not widely accepted.

Bitcoin Mining Electricity Cost Calculator

The profitability of Bitcoin Mining is a complicated process as numerous factors affect the profitability of Bitcoin Mining. Electricity consumption is one of the major factors affecting profitability. An electricity cost calculator is used for finding the amount of electricity consumption in kWh. The calculator estimates the amount of kW used in the whole day. After this, the kWh cost is estimated based on the user's location energy prices and then multiplied by 30 to find the monthly electricity expense. Based on these results, many miners shifted to locations where electricity prices were not very high.

A Pickaxe Strategy for Bitcoin Mining

During the California Gold Rush of 1849, hordes of people descended on the West Coast to search for gold and make their fortune. Naturally, this was a risky proposition, as success wasn’t guaranteed. But do you know what was a can’t miss success? Investing in the companies making the pickaxes that all the prospectors (the failures as well as the successful ones) had to buy.

In the context of Bitcoin, this means investing in the manufacturing companies that produce hardware most often used in Bitcoin mining, such as companies that make GPUs or ASIC equipment.

Pooling Resources for Bitcoin Mining

While miners may decide to go solo, joining a pool offers them immense benefits. Pool mining utilizes joint hardware capacity and allows miners to spread risks and energy costs while at the same time increasing their stakes of discovering a block and earning a block reward. It is also relatively less costly to join a mining pool, given that the capital requirement is spread across several miners. Even though income from mining is shared between miners, hence smaller payouts, it is stable thanks to the higher-earning stakes.     

The reward for each miner in the mining pool is calculated based on individual share difficulty and share time in the pool. The more powerful miners are typically assigned a higher difficulty and will thus be entitled to a larger proportion of reward compared to the others. The network automatically calculates the share difficulty and share time. However, each miner will be required to submit their share records. 

Hope you like the article on what is Bitcoin mining, in case you are new to bitcoin and blockchain and want to learn more? Sign up for Simplilearn’s Professional Certificate Program In Blockchain course. Want to get a résumé-boosting blockchain certification? Check out the Blockchain Certification training course.

FAQs

Why do bitcoins need to be mined?

Bitcoins risk getting copied, counterfeited, or double-spent by the same coin more than once. The mining process reduces these risks by making them expensive and resource-intensive.  

How does mining confirm transactions?

Mining transactions are validated digitally on the bitcoin network you use and add to the blockchain ledger. It is done by solving complex cryptographic hash puzzles to verify blocks of transactions updated on the decentralized blockchain ledger. 

Why does mining use so much electricity?

Bitcoin's decentralized structure drives its huge carbon footprint. It requires computers to solve more complex mathematical problems, which consumes more electricity than people realize. 

Is bitcoin mining legal?

According to TheStreet, reporting on a November 2021 Law Library of Congress report, bitcoin mining is banned in various countries, such as Bangladesh, China, Egypt, Iraq, Morocco, Nepal, Qatar, and more. However, it is legal in the US, and most countries, but not all US states allow the same. 

Does crypto mining damage your GPU/computer?

Not necessarily. Most GPUs rely on auxiliary fans that prevent degradation during longer periods. Hence, crypto mining doesn't harm the GPU/computer until it's cleaned to prevent damage. 

Can you mine bitcoin on your iPhone?

It is possible to mine bitcoin on your iPhone. However, you need to have authentic apps without any leaks in the app store. It takes around 10 minutes to mine one block with the reward of 6.25 bitcoins per block from the iPhone. 

How much money can you make mining bitcoin?

By mining one bitcoin block, you get a reward of 6.25 bitcoins, roughly $143,000. Moreover, the power required to mine one bitcoin is extremely high. However, the overall process turns out to be profitable.  

How do you join a bitcoin mining pool?

The bitcoin pool process is simple and free to join. The first step is to have bitcoin mining hardware. Then download bitcoin mining software. If you are unsure whether you want a free pool, you can go for paid pools that charge around a significant percentage of pool fees. 

What is a good hash rate for bitcoin mining?

With an excellent power source, mining hardware, and power efficiency, a bitcoin miner can get up to a hash rate of 10Th/s. However, the profitability of bitcoin mining depends on power cost, price of bitcoin, and power consumption.